IQ, Expectations, and Choice
78 Pages Posted: 24 Jan 2019 Last revised: 11 Nov 2022
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IQ, Expectations, and Choice
IQ, Expectations, and Choice
IQ, Expectations, and Choice
IQ, Expectations, and Choice
Date Written: January 18, 2019
Abstract
We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.
Keywords: Behavioral Macroeconomics, Heterogeneous Beliefs, Limited Cognition, Expectations Formation, Household Finance
JEL Classification: D12, D84, D91, E21, E31, E32, E52, E65
Suggested Citation: Suggested Citation